Buyers like Kala, who expected EMIs to replace their monthly rent, are seeing their monthly budget spiral out of control as they are now paying both.

Buyers like Kala, who expected EMIs to replace their monthly rent, are seeing their monthly budget spiral out of control as they are now paying both.

Sachin Kala is still waiting to get possession of the flat he booked four years ago. The builder had promised to hand over the apartment in December 2013. But even though Kala has paid almost 80% of the total price, the project is still not ready to move in.

Kala’s only solace is that he is not alone. Thousands of home buyers across the country are facing the same problem. Housing projects are being delayed because cash-strapped builders are unable to complete construction. According to real estate analytics firm PropEquity, around 45% of the 3,753 projects in the Mumbai Metropolitan Region offered for possession during 2011-2014 are incomplete. The problem is more acute in NCR, where a whopping 78% of 856 projects are running behind schedule. The same trend is visible in other major cities like Bengaluru, Chennai, Hyderabad, Pune and Kolkata.

There are several reasons for the delays. To start with, the demand for housing from end-users has slumped due to high prices. The flurry of new launches during the boom period has also stretched the execution capabilities of builders. Many developers are facing a severe cash crunch because they diverted the sale proceeds from the new projects to those under construction.

For buyers, a new hope has emerged in the form of the Real Estate Regulatory Bill. The bill has several buyer-friendly clauses (see graphic) which could bring some order in a chaotic industry. For instance, the bill proposes that builders deposit 50% of the amount received from buyers in a separate escrow account to prevent diversion of funds. Also, a buyer can claim full refund with interest if a builder fails to deliver a project on time. The bill has been approved by the Cabinet and will be tabled in Parliament.

Impact of delayed projects

The delay in construction and handing over possession can be financially debilitating for first-time buyers. Many buyers factor in a 10-12 month delay into their planning when they book a house, but very few expect the delay to extend beyond two years. According to PropEquity, the average delay in the Mumbai Metropolitan Region is 25 months. In NCR, it is 33 months. The bigger the project, the longer is the delay.

Buyers like Kala, who expected EMIs to replace their monthly rent, are seeing their monthly budget spiral out of control as they are now paying both. “I am paying rent as well as the home loan EMI. It is very difficult and I don’t know what to do,” says the Ghaziabad resident. Even double-income families can find the situation challenging.

The situation is not any better for investors who bought their second or third house. They had expected that their investment will start earning rental income, which would take care of some portion of the EMI. Their calculations have gone awry due to the delay. They are paying EMIs but there is no sign of rental income yet.

Losing tax benefits

A delay in getting possession also implies you will not be able to benefit from any kind of tax deduction until the project is completed. Home buyers count on the tax breaks provided to them in the form of deduction up to Rs1.5 lakh towards principal repayment (included under Section 80C) and a further deduction up to Rs2 lakh towards interest payment (included under Section 24). However, to get deduction under Section 24, the buyer must get possession of the property within three years of taking the loan. If the 3-year deadline is not met, the deduction benefit reduces to only Rs30,000 a year. Imagine the plight of a buyer who has taken a Rs50 lakh home loan and hopes to reduce his taxable income by Rs2 lakh. If the project is delayed and he misses the deadline, it would translate into a tax loss of Rs10.9 lakh over a 20-year period (see graphic). In case of a joint loan, the tax loss could be higher.

One way out of this situation is selling the delayed property and buying a ready to move in property. However, real estate transactions cannot be done quickly. They also have very high entry loads in the form of registration charges and transfer fees. Also, the seller may not get a good price for the delayed project while the ready flat will be at a premium. Mercifully, the three-year rule does not apply to property that is rented out. People who have bought real estate as an investment and intend to rent it out can breathe easy. “For rented or deemed as rented property, the entire interest is deductible even if the construction takes over three years. So, there would not be any tax-related loss if there is a delay. However, the tax benefit gets deferred till you get possession,” says Sudhir Kaushik, CFO and Co-founder, Taxspanner. Another solution is to delay the home loan by funding the first few instalments out of your savings. The three-year countdown begins not from the time you booked the flat but from the last day of the financial year in which the home loan was taken. You can liquidate some of your investments to pay for the initial instalments. However, do consider the opportunity cost of utilising the money versus investing it in some other asset class. “If the interest on the loan is higher than the returns your investments are earning, go ahead and utilise the money,” says Adhil Shetty, Founder and CEO, Bankbazaar.

Avoiding delayed projects

Information is the most effective safeguard against a delayed project. You can avoid falling into the traps laid out by unscrupulous developers if you have enough information. “A certain degree of due diligence and awareness about their rights can protect consumers against unscrupulous practices by developers,” says Anuj Puri, Chairman and Country Head, JLL India. Here is a checklist of some basic precautions to take.

Developer’s track record: Assess the builder’s track record of completing projects on time. There is no ready database, but you can ask other buyers if the developer had delivered earlier projects on time and offered the promised facilities. Refer to online forums which often have buyer discussions on project delays and other issues. If the builder has a reputation of delays, junk your buying plans. Avoid new names and obscure groups.

Licences and approvals: Find out if the developer has the title to the land on which the project is coming up and has obtained all necessary permissions. Often developers start selling apartments even before they have acquired the land. This can lead to big delays if the land acquisition hits a legal hurdle. “Buy properties where all the necessary approvals are in place, the developer does not have any projects struck, either due to approval or construction delays, and where the construction is already happening at a suitable pace,” advises Samir Jasuja, Founder and CEO, PropEquity. Also, make sure the builder obtains an occupancy certificate. Legally one cannot move into a building without an occupancy certificate from the local authorities. The residents of the troubled Campa Cola Society in Mumbai have realised this the hard way.

Terms of payment: Is the builder asking for most of the money at an early stage of construction? It is best to stick to a construction-linked payment plan, where the builder is required to be paid at specific stages of construction. “Buyers can shield themselves from the financial implications of delayed projects by ensuring that their payment terms are linked to construction stages,” argues Sanjay Dutt, Executive Managing Director (South Asia), Cushman & Wakefield. However, buyers could still face a problem during the finishing stages of construction. In construction-linked plans, almost 70-80% of the loan is disbursed by the time the structure is complete and delays usually happen only after this stage. “Finishing takes a lot of time and money and it is typically at this stage that a cash-starved project will slow down. Even a year’s delay will add hugely to your interest cost,” says Monu Ratra, CEO, India Infoline Housing Finance.

Some developers offer plans where a substantial portion of the cost has to be paid after possession. Such plans compel the developer to hand over possession at the earliest.

Some builders offer interest-subvention schemes that promise to bear the EMI burden till possession or for a fixed period of 1-2 years. However, this is just an eyewash. If the builder delays construction, the buyer takes a hit. “The interest subvention schemes have fixed tenures, after which the burden is back on the buyer even if the project gets delayed infinitely,” says A.S. Sivaramakrishnan, Head of Residential Services, CBRE India.

Delay clauses: Delays often push up the cost of construction. Builders slip in a ‘costescalation clause’ into the agreement, which says that the developer reserves the right to hike the price if the cost of building materials or other inputs goes up. Don’t buy into a project that has such a clause. Instead, opt for one that has a ‘penalty clause’ in the agreement for a delay. Most penalty clauses though are stacked in favour of the builder. There have been instances where developers have gotten away with payment of Rs5-7 per sq ft per month as penalty, while customers were charged as much as 16-18% penal interest on late payments. Developers also find ways to circumvent the penalty clause and deny payment to the homeowner by justifying the delay. Puri exhorts buyers to pay attention at the time of drafting the sale agreement. “The developer will usually present a readymade agreement, and a buyer must ensure that this captures every relevant detail. He is entitled to ask for the missing details to be included.”

Big lenders and investors: If some top banks are lending for the project and big private equity funds are invested in it, rest assured that all documents and approvals will be in place. Players like HDFC and LIC Housing Finance conduct rigorous checks before clearing projects for loans. “Buyers can ascertain if any reputed financial agency or equity funds have made purchases in the projects. These will ensure pressure on developers to complete their projects,” says Dutt.

Lure of special offers: Builders offer freebies and discounts to lure buyers. Your decision should be based on the quality of the project and the credibility of the builder. Be sceptical of too many freebies.

Your options if your house is delayed Till now, if a project got delayed, there was no quick relief. But this could change after the Real Estate Regulation and Development Bill is passed. Till that happens, there are other ways to get your grievances addressed.

Form a buyers’ association: An individual’s plea can fall on deaf ears but forming a group could make the builder stand up and take notice. Form a joint front to put forward your demands. A collective effort would yield result in larger projects. Leverage the power of social media. An association of buyers can be started with two members. However, to add legitimacy, it is necessary to register your association. Consult a lawyer to help with the legalities. If you are lucky, the builder will yield to pressure. If not, the legal option is open. Even then, you stand a better chance of winning it as part of a larger group.

Take legal recourse: You can take the builder to court for delay in handing over possession, making unapproved changes in construction layout, not providing promised facilities and much more. There have been several instances where the verdict has gone in favour of the buyer (see box) for grievance redressal. “The power of these forums should not be underestimated,” says Puri. DLF was one such major builder that was recently accused of drafting a “lop sided builder-seller agreement” by the Competition Commission of India (CCI). So don’t let big builders trample your rights.